Pensions are just one of the assets a court will give consideration to when dealing with finances on divorce. Pensions can be dealt with by way of pension sharing, pension attachment or offsetting. In this article, we consider the importance of dealing with pensions on divorce.
It is not unusual for one person to have a larger pension provision than the other, but for the couple to have intended this asset would provide for them both in retirement. Within divorce proceedings it is possible to share pensions so that the spouse who has the smaller provision, or no pension, receives their own pension pot from the ‘share’ they receive to use for themselves in retirement (pension sharing).
The financial disclosure that both parties provide will include the Cash Equivalent Value (CEV) for each pension. In practice, questions may need to be raised of the CEV as in some cases the true value of the pension may be significantly more than the CEV suggests, such as in the case of final salary and occupational pensions such as NHS/armed forces/civil service pensions. In other cases, the CEV can be misleading because it does not take into account the fact that tax will be payable on 75% of the pension. It is important to have the appropriate advice, on pensions particularly if they are significant.
An entitlement to receive a pension share can be offset against other assets. If one spouse is keen to keep another asset, such as the family home but this comprises more of the liquid capital in a case, all is not lost if there are also pension assets. It is possible to offset the value of a pension share so that the person who retains the benefit of the pension receives less of the liquid capital that is available (offsetting). Again, it is important to have proper advice as to what offset calculation is appropriate.
In some cases, even where pensions are not being shared, they can be used to provide an income for both spouses in retirement with maintenance being paid from pension income (pension attachment). Pension sharing is used far more frequently nowadays, particularly as a pension attachment order comes to an end on the death of the member of the pension scheme. The rules for pension attachment are different to pension sharing and, again, the appropriate advice should be sought.
Pensions can provide additional options where a couple are close to retirement age, for example taking a tax-free lump sum sooner than planned to release capital to rehouse. A pension sharing order can then be made afterwards to provide an income stream for both parties if appropriate. Again, it is important for both parties to have financial advice if this option is being considered.
To conclude, pensions should be properly considered in any divorce settlement. In some cases it is possible to exclude pensions that accrued outside of the marriage from the matrimonial pot, particularly if a sharing of those pensions is not required to meet the other party’s needs. Where a pension is a matrimonial asset, it is important to consider whether offsetting, pension sharing or pension attachment is the most appropriate option, taking into account the circumstances of the individuals.